What's American and Envied by France?

By Anne Dumas
Sunday, June 5, 2005


Praising America isn't the sort of thing that the French run around doing. When we're not lamenting the metastasizing McDonald's outlets, criticizing Hollywood movies or resisting the Americanisms that are creeping into the French language, we are blasting recent U.S. foreign policy. No wonder a book predicting "the breakdown of the American order" became a bestseller here last year.

But there's one area in which France would love to emulate that place across the Atlantic -- the ability to foster small businesses and turn them into big ones.

It's not exactly haute culture , but these days this is a vital topic here in France, where the unemployment rate has been stuck between 9 and 10 percent for a quarter of a century and where not a single enterprise founded here in the past 40 years has managed to break into the ranks of the 25 biggest French companies. By comparison, 19 of today's 25 largest U.S. companies didn't exist four decades ago. That's why France is looking to the United States for lessons. And it's why it was meant as a compliment when the French media dubbed the former finance minister, newly appointed interior minister and potential president Nicolas Sarkozy "the American."

For years, France has been pouring bad old economic policy into new bottles. "France has not solved the crises of the 20th century, including rampant unemployment, and it has to face the challenges of the next one: globalization and a new kind of world terrorism. The country has lost 2 million industrial jobs in the last 25 years," explains Nicolas Baverez, a talented historian, lawyer and op-ed writer, who wrote a book on the decline of France. Although the situation is dire, France lingers in what is matter-of-factly branded "French immobilism."

This sense of job insecurity and of being stuck contributed to the trouncing of the European constitution in last Sunday's referendum. And the job anxiety isn't limited to the lower class. Over the past couple of years, there has been a 27 percent jump in unemployment among managers.

It's no small thing for a country like France to admit its weaknesses, yet many opinion leaders here now concede that France has the rhetoric of a world power without the economic means of one. So even though President Jacques Chirac was content to let the Bush administration go it virtually alone in the war in Iraq, France is ready to follow the American lead when it comes to business development.

And that is exactly what the country badly needs right now. Consider this tantalizing bit of information: There are 2.5 million small businesses in France, each with anywhere between one and 250 employees. They generate half of France's economic output and employ two-thirds of the total working population of 27 million, according to the National Institute for Statistics and Economic Studies in Paris. If every one of those small businesses hired just one more person, there wouldn't be any unemployment in France.

Every country undertakes reform in keeping with its own traditions. In France, where the state has dominated the economy, even the impetus for economic change comes from the state.

Citing an economic reform approach known as the "Lisbon strategy" from a March 2000 European Union meeting, the country has finally decided to make a boost in research and industrial innovation a top priority. (France's growing problem with the outsourcing of jobs to other countries has also spurred reforms.)

The first initiative has been to promote the idea of clusters, or what are called "competitive poles" here. The state plans to allocate nearly $1 billion over the next three years to about 20 regional projects, ranging from biotechnology to communication, from energy-related projects to nanotechnology ventures. "It is unprecedented for rival businesses, research centers and local politicians to forget clan differences and work for a common cause," says Nicolas Jacquet of the Paris Business and Industrial Community. "And it shows the sense of urgency that you feel in France."

The French government is also creating a National Research Agency, which will be granted $2.4 billion over the next three years. The goal is to finance projects, private or public, based on evaluation by international peers. It seeks to replicate the "bottom up" approach of the National Science Foundation in the United States. "I came back to the basics," says Elie Cohen, a prominent economist who designed the project with Philippe Aghion, a professor of economics at Harvard University. "I thought about [Chinese leader] Deng Xiaoping. He could not fight the system so he decided to circumvent it by allowing surplus quotas to be sold on the free market. In France, you cannot counter the rigidity of the state research system, so this way, [at least] the money will not be feeding the beast."

Chirac's government has opened yet another front. The purpose: to enhance French competitiveness through large-scale industrial programs, like those used to promote Airbus, the French space program and the French nuclear industry. Even here, France is looking to the United States and agencies like NASA for inspiration. "Don't forget," says Patrick Arthus, another leading economist, "that one of the keys to the U.S. paramount position in the world of R&D stems from the fact that substantial federal funds are injected into military programs that ultimately find civilian applications. In France the military budget is on the decline, so the state has to find different means to promote and finance high-tech research."

The last initiative designed to break France's economic stagnation is to set up a Small Business Administration à la française . A group of French senators and top officials have traveled to the United States to study the U.S. agency. The government has gone halfway toward setting up a comparable structure called OSEO. Launched in January, it merges an agency that promotes innovation in small- and medium-size businesses and a state-owned bank that specializes in financing them.

But key elements are still missing in France. One is the range of advice available to small U.S. businesses. French companies can obtain financial and technical advice through OSEO. However, small companies "do not have access to a network of consultants that provide them with managerial or legal support," says OSEO's president, Jean-Pierre Denis. This helps explain the stunted growth, not only of French startups but of what Denis calls "teenage" businesses.

One example is IDM, a company specializing in cancer immunotherapy. Founded in 1993, IDM opened a California subsidiary in 2002 to gain greater access to capital. "In the field of biotech, where companies usually have to spend a few hundred million dollars before becoming profitable, France cannot cope with maturing companies," says Herve Duchesne de Lamotte, IDM's chief financial officer. "In the U.S., investors are ready to invest approximately 10 times the amount you could raise in France." In March, IDM announced plans to merge with San Diego-based Epimmune, which is listed on Nasdaq. IDM's CEO will run the combined firm, which plans to take IDM's name.

French firms are also hobbled by rigid labor rules and a lack of flexibility that discourages innovation. And businesses are loath to add employees because it's expensive. According to the Organization of Economic Cooperation and Development (OECD), taxes here make up 48 percent of the cost to businesses of paying the average production worker. Among OECD nations, only Germany and Belgium impose higher payroll-related taxes. In the United States, taxes on the average production worker account for only 29 percent of labor costs. For a fraction of the amount paid to unemployed workers, who receive 54 percent of their previous pay for up to two years, the French government could provide incentives for employers by easing taxes on new hires.

It's not just a matter of taxes, though. "The difference is also cultural," explains Thomas White, the counselor for economic affairs at the U.S. Embassy. "It is not a bad word in the United States to be funded by private money or to work on a project that has commercial applications." But in France, there is a chasm between public and basic research on one side and private and applied research on the other.

Patrick Devedjian, until last week the minister of industry, has been on the front line when it comes to rethinking French industrial policy. "The state has been at the center of the country's industrial projects since Louis XIV or Napoleon," he explains, "but the problem today is that the state is locked into its own rigidity."

His ambition to keep the state from stifling innovation and creativity is a laudable one, but the lack of opportunities has driven some of France's most talented research scientists abroad. "Hopefully, our new policy will stop the brain drain, and we are considering using headhunters to bring some top scientists and engineers back," says Devedjian.

This might be easier said than done. For years members of the French scientific elite have gone abroad to find recognition and make a living for themselves in more open-minded environments. It will take more than words to entice them back.

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Anne Dumas, a French citizen, worked in South Africa for the French newsweekly Le Point during the 1980s, owned and ran a gourmet chocolate company in California in the 1990s, and has worked more recently as a journalist and business consultant in Paris.

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